Wednesday, December 31, 2008

SEC Issues Report on Mark to Market Accounting

The Securities and Exchange Commission recommended against suspending fair-value accounting rules, instead suggesting improvements to deal with illiquid markets and reducing the number of models used to measure impaired assets.

In a 211-page report to U.S. lawmakers, as expected, the agency's staff Tuesday definitely recommended that fair-value and mark-to-market not be eliminated or suspended. "The abrupt elimination of fair value and market-to-market requirements would erode investor confidence," the report said.

The banking lobby has argued that financial institutions have been forced to write off as losses still-valuable assets because the market for them had dried up, creating a spiral of write-downs and asset sales.

The report said that staff found no evidence to suggest that the accounting rules had played a significant role in the collapse of U.S. financial institutions. "While the application of fair value varies among these each case studied it does not appear that the application of fair value can be considered to have been a proximate cause of the failure," the report said.

Additionally, the SEC suggests that the Financial Accounting Standards Board narrow the number of accounting models firms can use to assess the impairment for financial instruments.

Michael R. Crittenden at the Wall Street Journal

Monday, December 29, 2008

Merry Christmas from FASB, IASB

The IASB and the FASB have jointly proposed requiring companies to provide additional disclosures on all their investments in debt instruments, other than those classified in the fair value through profit or loss category. The FASB released FSP FAS 107-a and the IASB issued proposed amendments to IFRS 7, "Financial Instruments: Disclosures."

The joint releases require an entity to state in tabular form the fair value, amortized cost and amount at which the investments are actually carried in the financial statements. The amendments would also require a company to disclose the effect on profit or loss and equity if all the debt instruments had been accounted for at fair value or at amortized cost.

"We continue to act swiftly in dealing with accounting issues that have arisen as a result of the crisis," said IASB Chairman Sir David Tweedie (pictured) in a statement. "Enhanced disclosures for investments in debt instruments will provide greater transparency and help to regain investors' confidence in the financial markets."

Earlier, the IASB and the FASB also published for public comment proposals for clarifying the accounting treatment for embedded derivatives. The IASB said it was responding to requests asking for the IASB and FASB to clarify the requirements in IAS 39, "Financial Instruments: Recognition and Measurement and IFRIC 9 Reassessment of Embedded Derivatives."

The IASB came under pressure in October to amend IAS 39 to allow banks to reclassify some of their assets. Participants in a recent roundtable, however, asked the IASB to prevent any diversity in practice developing as a result of the amendments. The new proposals would require all embedded derivatives to be assessed and, if necessary, separately accounted for in financial statements.

"In October 2008, in response to exceptional circumstances, the IASB amended accounting standards relating to the reclassification of financial instruments," said Tweedie. "Issuing that amendment without normal due process always carried the risk of unintended consequences, and these proposals seek to clarify the application of that amendment to embedded derivatives."

The releases are set out here:

Tuesday, December 23, 2008

Cox: Independence of Accounting Standard Setters is Key

Excerpts from Speech by SEC Chairman Christopher Cox: Remarks Before the AICPA National Conference on Current SEC and PCAOB Developments

If we learned one painful lesson from the events of the 1930s, and from the more recent scandals of the S&L crisis in the 1980s and Enron, WorldCom and the rest in the 1990s and the first part of this decade, it is how vitally important it is to protect the independence of accounting standard-setters and ensure that their work remains free of distortions from self-serving influences.

That priority must also be reflected in any regulatory reform undertaken by the next Congress and the new administration. Accounting standards-setting should remain an independent function, and regulatory oversight of the independent private-sector standard setter should not become entangled with the competing priorities of evaluating and addressing systemic risk. Accounting standards should not be viewed as a fiscal policy tool to stimulate or moderate economic growth, but rather as a means of producing neutral and objective measurements of the financial performance of public companies.

Accounting standards aren't just another financial rudder to be pulled when the economic ship drifts in the wrong direction. Instead they are the rivets in the hull, and you risk the integrity of the entire economy by removing them.

There are those who say that independent standard setting is important, and who will agree that private sector standard setting is preferable to ensure that the process is not detached from reality — but who nonetheless say that while these things are true in ordinary times, these are not ordinary times. Therefore, they argue for setting aside the normal approach to standard setting, which identifies issues for consideration, gives the public exposure documents, includes outreach efforts, and then solicits comments on the exposure documents, and finally considers all of the resulting comments in finalizing and issuing new accounting standards. All of that, they say, should be set aside and replaced with a quick fix, whether the standard setters agree or not.

This view gives short shrift not only to the principle of independence, but also to the credibility of the standard-setting process and investor confidence in it.

The truth is that the value of independent standard setting is greatest when the going gets tough. The more serious the stresses on the market, the more important it is to maintain investor confidence.

None of this is to say that standard-setters can or should turn a blind eye to the events in the world around us; or ignore the valid criticism and input of leaders in business, politics, and academia; or endlessly debate and deliberate instead of act when action is required. To the contrary, that is what the transparent process is for. It is meant to achieve results, and to keep standards current.

Standards must keep pace with the real world to stay relevant, and they must be refined over time to better address weaknesses, as we have recently seen with the problems in valuing assets in illiquid markets. I believe it is critical that FASB complete its analysis of the SEC's request for expeditious improvement in the impairment model in FAS 115, made formally last October, in accordance with its established independent standard-setting process.

As we have learned, illiquid markets bring new challenges to the measurement of fair value that could not have been fully appreciated in past years. These challenges have brought into focus the need for further work on improving the tools that companies have at their disposal to achieve transparent, decision-useful financial reporting.
The entire speech can be found here.

Friday, December 5, 2008

Trouble in IFRS Paradise

Survey of says finance executives have in Europe about cost and effectiveness of IFRS

Convergence of accounting standards may be on its way, but finance executives in the U.S. don’t seem overly thrilled by the prospect. What’s more, these skeptics may be on to something—if the views of their counterparts in Europe are any indication.

Indeed, a survey of 749 finance managers in the U.S. and Europe uncovered a number of misgivings about the melding of the standards put forward by the Financial Accounting Standards Board with the rules set forth by the International Accounting Standards Board. Admittedly, over half of the U.S.-based CFOs, controllers and chief accounting officers who were surveyed—and 76% of those in Europe—said that accounting rules should be developed on the international level.

But many respondents in the U.S. seemed vexed about the actual switchover, which is aimed at developing one set of global accounting rules.

For starters, finance managers in the U.S. were extremely concerned about fair-value accounting. Over 60% of those who responded to the survey, which was conducted by Duke and Oxford Universities, think IASB is moving toward fair-value accounting. But nearly the same percentage said the adoption of fair-value accounting is a bad idea.

In addition, the respondents see big hurdles to convergence. When asked whether international accounting standards and GAAP are largely identical, about 40% of U.S. respondents said no. That raises questions about whether harmonization of accounting standards is even possible. About 43% of the finance managers surveyed in the U.S. said regulators are unlikely to achieve a set of unified global accounting rules and practices because legal environments and business cultures differ too much across countries and regions.

That’s hardly an encouraging result for IASB. It’s probably not good news for the Securities and Exchange Commission, either, which has firmly placed its weight behind convergence. Under the road map the SEC issued in November, all U.S. public filers would be required to report their results using the IASB’s rules by 2014. At least 110 public companies in the U.S. will be eligible to report using IFRS as early as next year.

Those managers contemplating early filing may first want to consider what their counterparts in Europe say about IFRS. The Duke/Oxford survey revealed that, while U.S. finance executives have worries about convergence, they tend to have a much higher opinion of the effectiveness of IASB standards than managers who actually use the rules.

Case in point: Only 4% of the U.S. respondents said that IFRS does not improve the transparency and usefulness of accounts to shareholders, investors and creditors. But in the U.K., which switched to international reporting standards three years ago, fully 53% of respondents said IFRS was not effective in improving financial transparency.

Likewise, only 6% of the surveyed finance mangers in the U.S. said IFRS would not improve public confidence in the markets. But nearly half of the U.K. respondents said international accounting standards were not effective in boosting public confidence in the markets.

What’s more, fully 60% of the respondents in Europe said the cost of convergence outweighed the benefits. That figure jibed exactly with the responses from U.S. finance chiefs: six out of 10 said the cost of switching to international accounting rules offset the benefits.

According to a recent study conducted by the SEC, the cost of convergence with IFRS will likely cost U.S. filers about $32 million each over a three-year period.

Despite concerns about costs, the move to harmonized accounting standards appears to be a done deal. Mike Lloyd, a partner at Deloitte who is in charge of the global treasury and capital markets team in London, said he is more confident now than he was a few years ago that the U.S. will adopt IFRS and that there will be a single set of international accounting standards.

But Mr. Lloyd, speaking today at a conference on treasury trends, added that one thing that could possibly derail convergence is if the European Union pressures IASB to change standards and ends up creating its own set of accounting rules. “But otherwise, it’s highly likely we’ll move to international standards,” he said.
By John Goff at Financial Week

Wednesday, December 3, 2008

SEC Road Map for Transition to IFRS

In mid-November, the SEC its long-awaited road map for the transition by U.S. public companies to the use of International Financial Reporting Standards (IFRS). The Commission set a longer-than-expected 90-day comment period for the proposal. The proposal sets out target dates that plot the required use of IFRS by certain U.S. issuers beginning in 2014. SEC also put forward two other proposals under which U.S. issuers that elect to use IFRS would disclose U.S. GAAP information.

The proposal provides that SEC will decide in 2011 if U.S. should pass laws that issuers must use IFRS beginning in 2014. Also provided are provisions for early adoption beginning in 2010 for certain issuers.

Critical points of the proposals:

  • Improvements in accounting standards
  • The accountability and funding of the International Accounting Standards Committee Foundation
  • Improvement in the ability to use interactive data for IFRS reporting
  • Education and training in the U.S. relating to IFRS
  • Limited early use of IFRS, beginning with filings in 2010, where this would enhance comparability for U.S. investors. Eligibility would be based on both the prevalence of the use of IFRS and the significance of the issuer in a given industry. The SEC estimates that a minimum of 110 companies could be eligible.
  • The anticipated timing of future rulemaking by the Commission
  • Implementation of the mandatory use of IFRS, including considerations relating to whether any mandatory use of IFRS should be staged or sequenced among groups of companies based on their market capitalization.

Under a staged transition, IFRS filings would begin for large accelerated filers for fiscal years ending on or after Dec. 15, 2014. Remaining accelerated filers would begin IFRS filings for years ending on or after Dec. 15, 2015. Non-accelerated filers, including smaller reporting companies, would begin IFRS filings for years ending on or after Dec. 15, 2016.

The Commission believes a staged rollout would help mitigate the costs of the shift to issuers and the resource demands on auditors, consultants and others. The Commission acknowledges in the document that a staged rollout would lead to a lack of comparability of financial information and would temporarily create a dual system of reporting that would require investors to be familiar with U.S. GAAP and IFRS.

The road map spells out two alternative proposals under which U.S. issuers that elect to use IFRS would disclose U.S. GAAP information.

You can read the roadmap here: